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Want to know a secret? You don’t have to be rich to buy a home or to qualify for a mortgage. Several mortgage programs exist that are designed to help people with low income achieve the dream of homeownership.
If you’re interested in buying a home, but have a lower-than-average income, one of the following mortgage types might be a good option for you.
USDA Home Loans
The United States Department of Agriculture (USDA) home loan program aims to help people who have low or middle incomes purchase a home in either a rural or suburban area. To qualify for a USDA home loan, not only do you need to earn less than the maximum income amount for your area, but you also need to purchase a home that meets the requirements of the program. For example, if you are looking to buy in a city or urban area, you won’t qualify for a USDA home loan. But you would be surprised by how many areas are designated as eligible in close proximity to city or urban areas.
Along with being available to people with low incomes, another benefit of a USDA home loan is that it doesn’t require a down payment.
USDA requires an upfront Guarantee Fee paid at closing, but is financed into the loan and the Annual Fee paid through your regular monthly payment.
FHA Loans
A Federal Housing Administration (FHA) loan is another type of government-guaranteed loan. FHA loans often have fewer credit, down payment and income requirements compared to conventional mortgages.
Unlike USDA home loans, you can buy a home in any part of the US and qualify for an FHA loan. Another difference between FHA and USDA home loans is the size of the down payment. To get an FHA loan, you usually need to make a down payment of 3.5% of the lesser of the purchase price or the home’s value.
FHA requires Upfront Mortgage Insurance paid at closing, but is financed into the loan and Annual Mortgage Insurance paid through your regular monthly payment.
VA Loans
If you served in the armed forces or are currently serving, you may be eligible for a VA loan when buying a home. A Certificate of Eligibility from VA will confirm eligibility for this VA benefit. VA loans have a few things in common with USDA home loans.
You can get a VA loan with no money down. Unlike an FHA loan, which requires you to pay mortgage insurance, no mortgage insurance is required when you get a VA loan. VA has an upfront VA Funding Fee which is paid at closing, but financed into the loan.
When deciding if you’re eligible for a VA loan, your lender will most likely look at your credit score and income but is likely to offer you a loan even if you have a low credit score or below-average income.
Conventional 97% LTV Loan
While FHA, USDA and VA loans are all government-insured loan programs, the conventional 97% loan is not. Instead, it is a loan program that seeks to remove one of the biggest barriers to homeownership: saving up a large down payment.
A conventional 97% loan might be the right option for you if you can afford the monthly mortgage payments under a loan but aren’t able to come up with 10 or 20% for a down payment. With a 97% LTV loan, your down payment is 3% of the lesser of the purchase price or the home’s value.
There are several loan product options with the 97% LTV option.
- If you are below the income limits set by the FHFA, you may be eligible under two programs that offer reduced mortgage insurance rates. These programs require Homeownership Education in certain cases.
- When your income exceeds the limits, but you or someone else that will be on the loan with you have not owned a home in the past three years, you may be eligible for the other two programs that offer LTV up to 97%. These will have slightly higher mortgage insurance requirements. Homeownership Education is required in certain cases.
There are pros and cons to each option when you’re looking for mortgages that are designed for low-income buyers. Understanding what each loan program requires and who’s eligible for what will help you choose the best mortgage for you. Contact the experts at Mortgage Investors Group with questions regarding the type of loan that is best for you.
